Accounting II Chapter 4

Accumulated Depreciation

A contra-asset account shown as a deduction from the related asset account in the balance sheet. Depreciation taken throughout the useful life of an asset is accumulated in this account.

Adjusted Trial Balance

A schedule indicating the balance in ledger accounts after end-of-period adjusting entries have been posted. The amounts shown in the adjusted trial balance are carried directly into financial statements.

Contra-asset Account

An account with a credit balance that is offset against or deducted from an asset account to produce the proper balance sheet amount for the asset.

Unearned revenue

An obligation to deliver goods or render services in the future, stemming from the receipt of advance payment.

Prepaid Expenses

Assets representing advance payment of the expenses of future accounting periods. As time passes, adjusting entries are made to transfer the related costs from the asset account to an expense account.

Adjusting entries

Entries made at the end of the accounting period for the purpose of recognizing revenue and expenses that are not properly measured as a result of journalizing transactions as they occur.

Depreciable assets

Physical objects with a limited life. The cost of these assets is gradually recognized as depreciation expense.

Immaterial

Something of little or no consequence. Immaterial items may be accounted for in the most convenient manner, without regard to other theoretical concepts.

Matching (principle)

The accounting principle of offsetting revenue with the expenses incurred in producing that revenue. Requires recognition of expenses in the periods that the goods and services are used in the effort to produce revenue.

Realization (Principle)

The accounting principle that governs the timing of revenue recognition. Basically, the principle indicates that revenue should be recognized in the period in which it is earned.

Book Value

The net amount at which an asset appears in financial statement. For depreciable assets, book value represents cost minus accumulated depreciation. Also called carrying value.

Useful life

The period of time that a depreciable asset is expected to be useful to the business. This is the period over which the cost of the asset is allocated to depreciation expense.

Materiality

The relative importance of an item or amount. Items significant enough to influence decisions are said to be material. Items lacking this importance are considered immaterial. The accounting treatment accorded to immaterial items may be guided by convenience rather than by theoretical principles.

Depreciation

The systematic allocation of the cost of an asset to expense during the periods of its useful life.

Straight-line method of depreciation

The widely used approach of recognizing an equal amount of depreciation expense in each period of a depreciable asset's useful life.

Accrue

To grow or accumulate over time: for example, interest expense.